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Crop Management - Symposium Proceedings: USDA Organic Farming Systems Research Conference

A Cost Comparison of Organic and Conventional Apple Production in the State of Washington

 

This article in CM

  1. Vol. 12 No. 1
    unlockOPEN ACCESS
     
    Accepted: Jan 06, 2012


    * Corresponding author(s): mtaylor@ksu.edu
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doi:10.1094/CM-2013-2013-0429-05-RS
  1. Mykel Taylor *a and
  2. David Granatsteinb
  1. a Assistant Professor, Department of Agricultural Economics, Kansas State University, Manhattan, KS 66506
    b Sustainable Agriculture Specialist, Center for Sustaining Agriculture and Natural Resources, Washington State University, Wenatchee, WA 98801

Abstract

Organic apple production expanded rapidly during the past decade due to strong demand, new technology, and price premiums, which suggests it is profitable for growers. No rigorous analysis of cost of production has been done to help project profitability in the face of continued increase in supply. The data presented here compare two methods of estimating cost of production and find that production of organic apples in Washington State, the leading producer, is approximately 5 to 10% more costly than conventional production on a per-acre basis.


Introduction

Organic apple production expanded rapidly during the past decade, reflecting increased consumer demand and new technology to control chronic pests and problems (3,5). Organic apple acres in the United States nearly doubled from 9,270 certified acres in 2000 to 17,626 acres in 2008 (9). As organic apples have moved from a niche product to a commodity, there is concern among growers and the industry about retaining a premium price that can help cover the perceived additional costs and reduced yields with organic production (4). The apple industry compiles detailed sales and price information for organic and conventional apples (e.g., Washington Growers Clearinghouse), but rigorous estimates of the cost of production are lacking.

A question facing the apple industry is just how profitable organic production will be in the long run. What if price premiums shrink or disappear? Will organic production continue or will it revert to conventional production? Economic theory suggests that a price premium decline could result from an increased supply of organic apples through either expanded production acres or greater yields on existing acres. Price premiums attract more growers such that in the long run the supply of organic apples will reach a level where economic profits are driven to zero by declining prices. Table 1 displays projected prices for Washington organic apples based on increased sales volume (6). The price premium is estimated to drop to zero once organic apple sales reach 12% of total Washington sales volume. During the 2009-2010 marketing year, organic apples sales were 6% of total apple sales for Washington. The average price received that year for all apples was $19.05 per 40 lb box (FOB) and $24.89 per box for all organic apples. These prices and corresponding volumes are very close to the values predicted by O'Rourke.


View Full Table | Close Full ViewTable 1.

Impacts of expanded organic apple shipments on price.

 
Conventional apple price($/box) Organic shipments as percent of allWashington apple shipments
6% 8% 10% 12%
Predicted organic apple price($/box)
20.00 26.77 24.45 22.13 19.82
17.00 22.75 20.78 18.81 16.85
14.00 18.74 17.11 15.49 13.87
xPrices are FOB. Source: O'Rourke 2009 (6).

This article summarizes cost of production data on organic versus conventional apple production, for the state of Washington. The production cost data are then used to determine the level of profitability for organic apple production under different yield and price scenarios. This information will enable the apple industry to better understand the long-term profitability of organic production.

Cost of Production Estimates Using the 2007 ARMS

The first set of production cost data used in this study is from the 2007 Agricultural Resource Management Survey (ARMS) of United States apple producers. This survey was conducted by USDA-NASS and is the first ARMS survey to be conducted for a specialty crop. Individual apple producers were interviewed to collect detailed information on their apple enterprises. The survey was comprised of questions regarding production methods, inputs used, yields, and itemized costs and returns, among others. The questions were all asked based on the 2007 production year and interviews were conducted three times, once during the growing season to determine if they were still in production for the crop of interest and two subsequent times to gather costs, returns, and production data after harvest and marketing of the 2007 crop.

Apple orchards in seven states were sampled in the survey (California, Michigan, New York, North Carolina, Oregon, Pennsylvania, and Washington), which represent over 90% of the apple production in the United States. In addition to the primary sample of apple orchards, a subsample of organic orchards was also included in the survey (8). The vast majority of organic growers who responded to this survey were located in Washington. (For further details on sample selection and survey design of the ARMS survey, refer to the ERS site). Due to the limited response of organic growers in other states, a comparison of production costs between organic and conventional orchards is presented for Washington only.

A typical production cost or enterprise budget lists costs in two primary categories: variable costs and fixed costs. Variable costs are defined as costs that occur during a single production year and would not be incurred if production was stopped for some reason. Examples of variable costs include fertilizer and chemical (both the inputs and the labor for application), water and electricity used for irrigation, and harvest labor and hauling costs. The fixed cost category includes costs that are born by the farm whether they choose to produce in a given year or not. Examples of these costs include interest payments on land and machinery, depreciation, and property taxes. While these costs can be avoided in the long run if the farm assets are sold, they must be paid in the short run regardless of whether or not a crop is harvested.

The costs of production for both conventional and organic orchards are listed in Table 2. The costs are grouped into categories within fixed and variable costs and given on a per-acre basis. The conventional production costs are based on 121 orchards in the state of Washington with an average apple acreage of 218.5 acres. The organic production costs are calculated using a smaller sample of 31 organic Washington orchards that average 88 acres of apples. (Orchards with less than 10 acres of apples were omitted from the sample used to calculate the production costs.) The results of the ARMS survey suggest that, on average, the cost of production for organic apples is $496.52/acre (9.5%) higher than the costs for conventional production. The primary difference in costs appears to come from labor costs, which average $357/acre more for organic apples. Based on these data, which reflect a single growing season, the revenue from organic apples needs to be high enough to cover an additional $497/acre for profitability to be no different than it is for conventional apples.


View Full Table | Close Full ViewTable 2.

Production costs for conventional and organic apples from 2007 ARMS.

 
Production costs for all conventional apples($/acre) Production costs for all organic apples($/acre)
Variable costs Variable costs
Labor 2,382.76 Labor 2,740.07
Chemicals & fertilizer 578.32 Chemicals & fertilizer 610.32
Maintenance & repairs 168.29 Maintenance & repairs 217.01
Fuel & oil 177.75 Fuel & oil 199.45
Irrigation/electric charge 142.69 Irrigation/electric charge 150.39
Custom work 69.07 Custom work 81.49
Crop insurance 49.15 Crop insurance 87.37
Other expenses 471.12 Other expenses 418.80
Total Variable Costs 4,039.15 Total Variable Costs 4,504.90
Fixed costs Fixed costs
Depreciation 414.44 Depreciation 492.98
Interest 162.65 Interest 246.45
Property & estate taxes 75.78 Property & estate taxes 82.67
Insurance (all farm) 67.32 Insurance (all farm) 48.25
Rent & lease payments 58.26 Rent & lease payments 17.28
Capital replacement 383.81 Capital replacement 305.40
Total Fixed Costs 1,162.26 Total Fixed Costs 1,193.03
Total Costs 5,201.41 Total Costs 5,697.93
xCosts calculated from 121 orchards in the state of Washington.
yCosts calculated from 31 orchards in the state of Washington.

Cost of Production Estimates: 2009-2010 WSU Enterprise Budgets

One of the advantages of data collected from the ARMS survey is the level of detail it provides to researchers. This detail facilitates a wide variety of analyses and greatly expands our knowledge of what producers are doing and how they make decisions for their orchard enterprise. A drawback of such a detailed survey is that it is expensive to conduct and, consequently, does not occur regularly. While a single year of data provides much insight, it may also have been an unusual year for certain variable cost centers. Therefore, we consider an alternative source of information on the costs of production for both conventional and organic apples in Washington to provide a basis for overall comparison.

The alternative sources are enterprise budgets published by Washington State University Extension for conventionally (2) and organically (1) produced Gala apples. The data used to create these budgets are collected in a very different manner from the ARMS survey. Rather than taking a random sample of both organic and conventional apple growers, a panel of growers with extensive experience was selected to be interviewed jointly. First, the panelists decided on certain characteristics for a block of Gala apples, including the methods of production, rootstock, trellis structure, and other technologies that would be employed. They subsequently decided on the costs that would be typically incurred, based on the assumptions of the given block and their own cost of production data. Rather than a survey of what growers are currently doing and the corresponding costs, these budgets are meant to reflect the latest developments in apple production and the full economic costs of both establishment and full production of an apple orchard.

To capture the full economic costs of production, opportunity costs are included in the budget. For example if the growers own the land, then they may not report an interest cost for land in the ARMS survey. In the Washington State University (WSU) enterprise budget, however, an interest cost is included to account for either interest explicitly paid on a land loan or the opportunity cost of using land that is owned outright in the production of apples. Other economic costs that are included in the WSU budgets are those attributed to establishment costs. For a grower to fully establish a 40-acre Gala block, they will spend approximately $1 million dollars in the first year alone. Whether this is paid by the grower in cash or a loan is taken out to fund the four years of establishing a Gala block, an amortized cost needs to be included in the budget for either explicit loan payments or the opportunity cost of cash used to pay for the investment. Therefore, cost categories such as management cost (cost of owner's time), interest on land, and amortized establishment costs are included in the WSU budget, but are not necessarily going to appear in the ARMS cost data and the per-acre costs will be substantially higher for the WSU budgets as compared to the ARMS data.

The variable cost estimates from the WSU budgets for conventional and organic Gala apples are shown in Table 3. These budgets indicate the per-acre cost difference between organic and conventional production for Gala apples is $462/acre or 4.3% greater for organic. Unlike the ARMS survey where labor costs were very different between organic and conventional production, the biggest difference in the WSU budgets is the additional $618/acre cost for chemicals (pesticides and growth regulators) and fertilizers for organic production. Based on the WSU budgets, organic growers would require $462/acre more revenue than a conventional grower to be equally profitable producing Gala apples.


View Full Table | Close Full ViewTable 3.

Production costs for conventional and organic apples from 2010-2011 WSU budgets.

 
Production costs for conventional gala apples($/acre) Production Costs for organic gala apples($/acre)
Variable costs Variable costs
Labor 2,652.35 Labor 2,590.00
Chemicals & fertilizer 900.00 Chemicals & fertilizer 1,518.00
Maint., repairs, fuel & oil 485.00 Maint., repairs, fuel & oil 560.00
Irrigation/electric charge 100.00 Irrigation/electric charge 100.00
General farm labor 500.00 General farm labor 550.00
Crop insurance 86.52 Crop insurance 86.52
Other variable costs 927.60 Other variable costs 966.00
Total Variable Costs 5,651.47 Total Variable Costs 6,370.52
Fixed costs Fixed costs
Depreciation 403.87 Depreciation 363.47
Interest 819.90 Interest 850.40
Property & estate taxes 75.00 Property & estate taxes 75.00
Insurance (all farm) 50.00 Insurance (all farm) 50.00
Management cost 400.00 Management cost 400.00
Capital replacement 218.75 Capital replacement 250.00
Amortized establishment costs 3,138.10 Amortized establishment costs 2,823.74
Annual certification fee 0.00 Annual certification fee 36.00
Total Fixed Costs 5,105.62 Total Fixed Costs 4,848.61
Total Costs 10,757.09 Total Costs 11,219.13

Conclusion

The budgets shown in this study provide insight into the cost of producing both conventional and organic apples in the state of Washington. Comparing costs from the 2007 ARMS survey and the 2009-2010 WSU enterprise budgets allows for a better understanding of the range of costs that growers face in the apple industry. The nature of the ARMS survey is such that certain economic costs may not be captured and the single year snapshot may alter the average costs if some orchards faced unusual production or management circumstances. The WSU budgets are more comprehensive in the inclusion of all economic costs, but also assume a high level of production and management. Therefore, the per-acre costs should be considered a plausible range for apple production, with the ARMS data providing a lower bound and the WSU budgets an upper bound.

The comparison between organic and conventional costs of production is similar, regardless of the data source used. It appears that the per-acre cost of producing organic apples is approximately 5 to 10% greater than conventional apples, at least for the state of Washington. This result may not hold for other growing regions in the United States, especially those prone to different disease and pest problems. Growers in the semi-arid region of the western United States face less daunting pest and disease problems than growers in more humid regions. With estimates of the cost of production for both organic and conventional apples, it is possible to estimate profits to growers. Table 4 displays the projected profit per acre for several different price and yield scenarios. Previous research has suggested that, on average, organic growers will produce approximately 10% less per acre then their conventional counterparts (4). The profit sensitivity analysis presented here accounts explicitly for yield differences between organic and conventional apples. We do not assume a quality difference. This is based on previous research which found no significant difference in fruit quality between organic and conventional apples (7). Assuming this yield difference and a $50 per bin price premium for organic apples, the sensitivity of profits to variability in yields and price appears to be similar for organic and conventional orchards. Either production method can yield a loss if either prices or yields (or both) are low enough. As an example, if prices were to be $300 per bin for both organic and conventional apples, a conventional grower would benefit from higher yields and be profitable. Organic growers would be more susceptible to a negative profit due to lower yields.


View Full Table | Close Full ViewTable 4.

Profit Sensitivity of Organic and Conventional Apple Production

 
Conventional apple profit per acre Organic apple profit per acre
Yield (bins/ acre) Price ($/bin) Yield (bins/ acre) Price ($/bin)
200 250 300 250 300 350
40.0 -2,757.09 -757.09 1,242.91 36.0 -2,219.13 -419.13 1,380.87
45.0 -1,757.09 492.91 2,742.91 40.5 -1,094.13 930.87 2,955.87
50.0 -757.09 1,742.91 4,242.91 45.0 30.87 2,280.87 4,530.87
Total cost 10,757.09 $/acre Total cost 11,219.13 $/acre
xPrice at the door of the packing house, including transportation from orchard to packing house. Price is after packing, storage and other charges have been taken out.
yAssumes a packout of 18 fresh packs per bin (all grades) and bin size of 925 pounds. Organic apple yield is assumed to be 10% less than conventional.
zTotal cost per acre from the WSU enterprise budgets for Gala apples. Assumes full economic costs, including amortized establishment costs.

To answer the industry's question of the long term profitability of organic apple production, organic apples grown in Washington are not considerably more expensive to produce than conventional apples. However, profits are a function of both costs and revenue. As shown in Table 4, if either prices or yields are low enough, profitability for both organic and conventional apple growers can be negative. Under a scenario of no price premium for organic apples, profitability will be comparable to conventional productions if yields for organic apples are also comparable.

 

References

Footnotes


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